Obamacare's Creative, Or Illegal, Rule-Making

The fix for the canceled health-insurance plans announced yesterday by President Barack Obama amounts to throwing the insurers under the bus -- “underbusing them,” as a friend calls it.

The administration said that it was going to allow noncompliant plans to continue to be sold, putting the onus on insurers and state insurance regulators to find some way to sell them -- even though there isn’t a lot of time to get the systems reprogrammed and approved by regulators, who aren't all on board, and the customers re-enrolled. Mostly, it’s a political move that allows the White House to duck blame for the cancellations, even if it’s too late to actually reverse them. If the insurers follow through, it could throw off all their actuarial calculations, costing them a bunch of money.

I wrote yesterday that this was a pretty bold -- or desperate -- move, considering that the administration still needs a fair amount of cooperation from insurers. The insurers are putting in a lot of work helping to get the exchanges working, and they will be very necessary allies indeed if Democrats don't want to go into next year’s midterms just as insurers are announcing their 2015 rates, and indeed, whether they’ll be staying in the insurance market.

But it seems that the administration is looking for ways to sweeten the deal for insurers. Politico reports, “Administration officials say they can take care of that problem. They're going to look at ways to adjust special payment mechanisms built into Obamacare, called 'risk corridors,' that pay health plans if they have higher costs than they expected.”

I’ve been skeptical of the argument that the risk corridors will fix things; they’ll mitigate insurer losses if the patient mix is too sick, but they don’t turn losses into profit. It’s a mechanism meant to deal with individual insurers who miscalculate their actuarial risk, not a whole marketplace filled with sicker and older patients than expected.

But this is a bit different; the administration is clearly looking for a way to increase the payments so that they defray more of the unexpected costs. Only looking at the statute, I don’t see how they can. The language is extremely clear:

SEC. 1342 42 U.S.C. 18062. ESTABLISHMENT OF RISK CORRIDORS FOR PLANS IN INDIVIDUAL AND SMALL GROUP MARKETS.(a) IN GENERAL. -- The Secretary shall establish and administer a program of risk corridors for calendar years 2014, 2015, and 2016 under which a qualified health plan offered in the individual or small group market shall participate in a payment adjustment system based on the ratio of the allowable costs of the plan to the plan’s aggregate premiums. Such program shall be based on the program for regional participating provider organizations under part D of title XVIII of the Social Security Act.(b) PAYMENT METHODOLOGY. -- (1) PAYMENTS OUT. -- The Secretary shall provide under the program established under subsection (a) that if -- (A) a participating plan’s allowable costs for any plan year are more than 103 percent but not more than 108 percent of the target amount, the Secretary shall pay to the plan an amount equal to 50 percent of the target amount in excess of 103 percent of the target amount; and (B) a participating plan’s allowable costs for any plan year are more than 108 percent of the target amount, the Secretary shall pay to the plan an amount equal to the sum of 2.5 percent of the target amount plus 80 percent of allowable costs in excess of 108 percent of the target amount.(2) PAYMENTS IN. -- The Secretary shall provide under the program established under subsection (a) that If -- (A) a participating plan’s allowable costs for any plan year are less than 97 percent but not less than 92 percent of the target amount, the plan shall pay to the Secretary an amount equal to 50 percent of the excess of 97 percent of the target amount over the allowable costs; and (B) a participating plan’s allowable costs for any plan year are less than 92 percent of the target amount, the plan shall pay to the Secretary an amount equal to the sum of 2.5 percent of the target amount plus 80 percent of the excess of 92 percent of the target amount over the allowable costs.(c) DEFINITIONS. -- In this section: (1) ALLOWABLE COSTS. -- (A) IN GENERAL. -- The amount of allowable costs of a plan for any year is an amount equal to the total costs (other than administrative costs) of the plan in providing benefits covered by the plan.(B) REDUCTION FOR RISK ADJUSTMENT AND REINSURANCE PAYMENTS. -- Allowable costs shall reduced by any risk adjustment and reinsurance payments received under section 1341 and 1343. (2) TARGET AMOUNT. -- The target amount of a plan for any year is an amount equal to the total premiums (including any premium subsidies under any governmental program), reduced by the administrative costs of the plan.

Don’t worry, I don’t expect that you’ve read the whole thing. But if you did, you’d see that the payments are quite firmly set as a percentage of allowable costs that exceed expectations -- and “allowable costs” is quite precisely defined. I am not a lawyer, of course, but this doesn’t seem to offer bureaucrats at the Department of Health and Human Services much discretion to run a slush fund.

The administration is already too reliant on creative rule-making to make the law work, such as their decision to delay the employer mandate even though it’s pretty firmly set into law. But now they’re reaching the limits of this strategy. There is always discretion in the implementation of any law, but that discretion is not infinite.

Moreover, this most recent exercise may create other problems. Jonathan Adler, a professor at Case Western Reserve University School of Law who is involved in one of the lawsuits against Obamacare’s implementation, points out in an e-mail that “the president's action doesn't make these policies legal, it just says the feds won't enforce. State insurance commissioners may approve, but federal law still prohibits these policies.” Which makes me wonder: If those policies end up in court, will a judge go along with their creative approach? And if a judge doesn’t go along with it, what sort of chaos will envelop the insurance market?

That’s leaving aside the civic problems with having an administration that simply waives by fiat any rule that gets in the way of their grand designs. President Obama, who used to be so sharply critical of George W. Bush’s use of executive power, is now pioneering his own expansive views of what the president may do. The White House seems to believe that they are allowed to shinny around any rule, as long as they wrote it. I’d argue that this is exactly backward: They have an especial duty to uphold the laws that they themselves constructed, because if they don’t, why should the rest of us go along?

Megan McArdle is a Bloomberg View columnist who writes on economics, business and public policy. She is the author of "The Up Side of Down."
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